Itaú BBA - Market Conditions Index - More balanced market conditions

Macro Vision

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Market Conditions Index - More balanced market conditions

septiembre 30, 2016

After a significant appreciation in the first half of 2016, the financial variables in IU-MCI were steady in recent months.

Please see the attached file for all graphs. 

Market conditions become more balanced in September. After a significant appreciation in the first half of 2016, the financial variables in Itaú Unibanco Market Conditions Index[1] (IU-MCI) were steady in recent months, but the indicator remains in expansionary territory. Thus, the three-month moving average three fell to 0.46, from 0.74 in August.

 

Considering IU-MCI’s breakdown, the Brazilian financial variables subcomponent posted a slight improvement in the month, increasing to 0.84 in September from 0.67 at the end of August. The 2.5% gain in the Ibovespa index and the 64 bps drop in 1-year interest rates explain the move. The three-month moving average rose to 0.84,up from 0.67 in August.

In order to analyze the factors behind the recent behavior in the Brazilian market, we have regressed the Brazilian financial variables subcomponent onto a market environment index built from peer countries[2]’ data (see Table 1 in the Appendix). The chart below shows that the idiosyncratic factors in Brazil continue to contribute positively, while factors affecting peer countries and Brazil contributed in the opposing direction.

The commodity prices subcomponent also posted a slight improvement in the month, to 0.15 in September from -0.38 in August. The three-month moving average receded to 0.2, coming closer to the historical average.

IU-MCI and economic activity

To verify the impact of financial conditions on economic activity, we consider a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the Appendix). The strong improvement in market conditions observed since April this year supports our stable growth scenario for the second half of this year.


 

Laura Pitta



[1] The IU-MCI measures the market conditions in Brazil and is also a good leading indicator of the country's economic growth, according to econometric exercises. The index consists of two sub-components: the first one is composed of Brazilian financial variables - interest rates, exchange rates, country risk measures - and the second is composed of commodity prices. A result above zero means that market conditions are expansionary, and below zero, contractionary.

[2] We consider the exchange rates and stock exchange indexes for 12 peer countries (Australia, Chile, Canada, Mexico, South Africa, Turkey, India, Russia, Peru, Indonesia, Malaysia and Thailand).


 

Please see the attached file for all graphs.



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